Factors To Consider Before Purchasing A Pension Plan
Published On Jan 06, 2022 10:00 AM By InsuranceDekho
Table of Contents
A few decades ago, people aimed to work throughout their productive life and retire only when they could no longer take it. However, the priorities have changed over time. Millennials do not prefer to have a life where they simply work for the most part and retire only when they cannot remain active. Early retirement is planned by most of the working professionals today. By taking an early retirement, these individuals aim to explore other avenues of life. Most importantly, they wish to enjoy a quality lifestyle after their retirement without any hassles or financial constraints. This is where a pension plan comes into play.
Retirement planning is essential for everyone irrespective of their income or lifestyle. The flexible plans available in the market allow people to choose an ideal retirement plan within their annual budget. Retirement planning is especially important if you are planning to retire young and well within your prime productive years. Your reason for early retirement could be anything, but there is no denying that you need adequate money to stay retired and enjoy what life has to offer.
Types Of Annuity Or Pension Plans
Let’s say you are planning to retire at 45 years of age. You need to have an understanding of the different variants of pension plans available for you.
Immediate Annuity Or Deferred Annuity Plans
Pension plans can be broadly classified into immediate annuity and deferred annuity plans. Immediate annuity plans are typically single-premium plans that pay pension immediately after the start (within a month or so) of the policy. In the case of deferred annuity plans, customers can choose the age at which the pension payment will start. The deferment period offered here will help policyholders build a corpus by investing yearly premiums. In addition, policyholders can also earn accumulated interest and profits through deferred annuity plans.
Endowment Or Unit-linked Plans
Policyholders may also choose between endowment and unit-linked pension plans. Most of the retirement savings plans are endowment plans that are risk-free. However, policyholders may also choose unit-linked plans if they have an appetite for high risk. Unit-linked plans provide the flexibility of allowing policyholders to choose the type of funds in which they invest. Similar to the risk, the growth potential is also very high here.
Plans With/without Life Coverage
These two variants are available in the market based on one’s requirements. In the case of plans without life coverage, only the invested money will be returned to the surviving dependents. On the other hand, plans with life coverage pay the sum assured amount mentioned in the policy document.
Factors You Must Consider While Purchasing A Pension Plan
Apart from the type of pension plan, you must also consider the following factors if you are planning to retire early:
- Monthly Expenses: Your day-to-day living expense is the main thing you must consider while planning your retirement. Once you retire, your regular source of income is cut-off. In this case, you need to think about your family’s regular monthly expenses. You need to build a corpus big enough to take care of these expenses. Apart from monthly expenses, you also need to allocate sufficient funds for your post-retirement activities. For instance, if you wish to travel every year, your annuity must cover these expenses and help you save money for travel. If the income from your pension plan is not sufficient, it could seriously affect your post-retirement plans.
- Inflation: When you are calculating your monthly expenses, do not make the mistake of calculating it based on today’s expenses. The cost of various things could increase drastically over the years. Hence, it is important to make sure that you take inflation into consideration while calculating your monthly expenses. Even a conservative estimate of 5% to 6% inflation per year could help you arrive at the near approximate amount you need in the future.
- Life Expectancy: There is no way to predict how long a person is going to live. Hence, your retirement corpus should be large enough to support your needs during your old age. Running out of money during the ripe old age is one of the worst things that could happen to anyone. Some annuity plans pay throughout one’s life and some plans pay only for a specific period. Evaluate your requirements carefully before you decide on which type of policy to purchase.
- Rate Of Interest: The returns offered by various pension plans differ significantly. If you are building a corpus from a very young age, you need to understand the rate of interest while calculating the returns offered by a policy. Most of the life insurers in the market have premium calculators that could help you determine how much you can earn from a specific pension plan.
- Major Expenses: There are certain major expenses you might have to encounter once or twice in life. For instance, you will have to pay for your children’s higher education and marriage. If you don’t have provisions for these expenses, your post-retirement plans will be drastically affected.
- Medical Expenses: When people retire young, they tend to ignore their future medical expenses. As you get old, you may have to end up spending a lot of money on medical checkups and treatments. If you have a health insurance cover, you need to consider the premium expenses. Also, it is essential to have adequate provisions for unforeseen medical expenses you may encounter in the future.
- Assets And Loans: Another major thing you have to consider is your current assets and outstanding loans. If you have outstanding loans, you should find a way to pay off these loans within your productive years. If these loans are not paid off, it could take away a chunk of your annuity income.
If you are planning to retire early, you must focus on all these factors while purchasing a pension plan. These factors will help you arrive at the exact amount you may need following your retirement. When it comes to pension plans, the best thing you can do is to start early in order to build a large corpus. If you plan your finances well, early retirement and high quality of life will be well within your reach.
Do read - Know Everything About Widow Pension Plans
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.